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Vodafone heading for a fall?

Full-year earnings for Vodafone could be a make-or-break moment for the shares, which currently trade at a heady premium to full-year estimates.

All trading involves risk. Losses can exceed deposits.

Vodafone has seen its shares rise to the giddy heights of 250p and more over the past three years, while also slumping to the lows of 180p in 2014. Overall, however, they reside at 223p, the same place as in the final quarter of 2014.

At this price they trade at 40 times forward earnings, versus just 14 times for its rival, BT. Essentially, at this level Vodafone is expected to post hefty improvements in its earnings in coming years, in the order of 20% or more, when the current forecast is for earnings to drop 10% for the year to March 2016. Expectations are for earnings to grow 22% in the next year, and 28% the year after that. Such forecasts look ambitious, at best.

One notable bright spot for Vodafone is its mobile payments service. This continues to add users across a variety of geographies, proving that even corporate behemoths can come up with good ideas.

It has also ramped up its coverage network, taking the hit on costs in order to position itself for a future in which customers download more and more data, and want to download it faster and faster.

At their current level, Vodafone shares trade on a dividend yield of 5%. That is not too far above the FTSE 100’s current 4.5%, but the worry for investors will be that earnings for the full year are expected to be 4.7p per share.

With a dividend of around 14p per share, the concern will be that the firm will not only have to abandon its progressive dividend policy, but also cut the payout itself. At that point, even with the possibility of further takeover approaches, the forward earnings multiple looks rather high.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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